EXCO Resources Juices Shares With MLP Announcement

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EXCO Resources (NYSE:XCO) plans to file a registration statement this quarter for an IPO for essentially all of its market capitalization to from a master limited partnership (MLP). According to the company’s press release, the IPO will issue $1.5 billion worth of common units; its market cap is currently about $1.9 billion. The offering is expected to close in the first quarter of 2008.

XCO says the IPO gives it "the opportunity to enhance valuation of a substantial portion of its mature producing properties" by creating an MLP that will go after additional mature properties, whether owned by XCO or a third party. The funds raised from the IPO will be used "to retire debt associated with the contributed assets" and for working capital.  In other words, a payoff to current officers and shareholders.

XCO already issued two flavors of preferred stock worth about $2B in private placements at the end of the first quarter. Once XCO completes the IPO of its MLP, virtually all the value will have been sucked out of the parent and the resulting MLP will be laden with debt.

There has been an identical trend elsewhere and there will almost certainly be more of these IPOs from small E&P companies like XCO, and all will have about the same terms. The value to investors in the MLP lies in the tax status and the rate of return projected by the company. The latter will be all-important in these deals.  So far, shareholders are eating this up as "XCO" shares are up over 1% to $17.95, less than $2.00 under the $19.70 all-time high since its IPO in early 2006.

Paul Ausick
July 30, 2007